When trading in the volatile market of cryptocurrencies that already comes with its fair share of risks, do you really want to take in any of the centralization-related risks as well?
- Centralized exchanges are often hacked, leading to users losing their funds.
- An exchange is a business in a grey area from a legal standpoint. Being seized by the authorities can lock a user’s funds for months or even years.
- The entire exchange can disappear overnight — Who are you going to complain to about that?
Two years ago, using a decentralized exchange (DEX) was a lot of trouble and people were losing their funds after making small mistakes like typing in the wrong address, but nowadays these platforms have become much more user-friendly than you’d expect. When was the last time you tried to trade on one? If you’re not willing to check it by yourself, in this article I’m going to debunk the myth of decentralized exchanges being hard to use (spoiler alert: some of them are even easier to use than a centralized exchange). At the same time, if you feel that you’re not up to date with the best DEXs out there, we handcrafted a short list for you to choose from.
Are DEXs popular yet?
No. Centralized exchanges like Coinbase, Binance, Bittrex still cover an astonishing percentage of 99% of the total cryptocurrency transaction volume. This is mostly because DEXs were still in their early stages in 2017 when most of the crypto traders joined the market. Are decentralized exchanges doing any better in 2019? Well, for starters there are an increasing number of discussions about DEXs on Twitter, Reddit, and Quora. Even Google Trends says that this topic has spiked. Is this the signal that people are ready to take in the benefits of a trustless administration?
The limitation of improvement among centralized exchanges
First, let’s understand what makes centralized exchanges so risky. These platforms enable users to buy, sell, and exchange cryptocurrencies, or simpler — they are marketplaces for tokens. Such solutions are essential for the cryptocurrency ecosystem. The problem is in the way they are choosing to handle the transactions.
A centralized exchange keeps its systems off-chain, meaning that transactions are not actually recorded on the blockchain, even though you are exchanging actual tokens on paper. For them to be able to do this, behind the scenes, they are always stocked up with actual tokens. These massive amounts of coins though are inadvertently making them into sweet honeypots for potential hackers. When a breach occurs in their security, millions of dollars are lost, and no insurance is able to cover that. No authority is able to track this and investigate. In case a successful attack happens, the exchange declares itself bankrupt, and who suffers the losses? You and all the other users who put their trust in the business.
Can’t DEXs be hacked too?
Any piece of software with Internet access can be hacked. That’s just a fact. The real questions are:
- How easy it is to do it?
- How big is the incentive for someone to do it?
A DEX is just a distributed order book. The exchange happens between two anonymous parties who agree to trade via a programmatically correct smart contract. The trade is happening between two parties and no one else. The only method for an attacker to succeed is to compromise one of the two clients. So, in case of a DEX, the methods for a malicious attack becomes more unpredictable and the reward much smaller.
Of course, we are assuming that the code of the DEX has no bugs. That’s why a DEX can be considered safe only after a number of audits, intensive testing, and proven years of being functional and serving its users. That’s why regular updates are not made to this type of software that can impact its users’ funds. That’s why it took two years for DEXs to reach the user-friendly state that matches today’s application standards.
What if the DEX is seized by regulators?
As stated before, a decentralized exchange is just an automated way for peers to find themselves and engage in a smart contract. Anyone in any country can participate. Not only that, but these platforms enable global trading and there is no fiat currency is involved in the process, DEXs don’t have to comply with AML (Anti-Money Laundering) laws and no KYC (Know Your Customer) process is required. Owning a cryptocurrency address is the registration to a DEX.
How does a decentralized exchange work?
A DEX is essentially a decentralized application (dApp), which functions like this:
- A token owner places an order: to exchange his/her assets with another asset available on the DEX. The token owner specifies the number of units they have to sell (in this case), the cost of each token, and until which time bidding for their assets is allowed.
- Once the selling order (described above) is set, other users can submit bids by signaling a buy order.
- Once the time set by the seller expires, all the bids are reviewed and executed for the best interest of both parties.
Actually, this is exactly the logic written in an exchange smart contract. How is this seen from the outside, as a user placing an order?
- You are using your wallet address to sign in to the DEX (the same process as logging in your wallet)
- You submit a buy or sell request
- The smart contract gets executed and the transfer of assets is done (the requested tokens will be sent automatically directly in your wallet)
And you’re done. Are you ready to give it a try?
Modern DEXs for any type of user
If 2017 was the best year for crypto so far and 2018 a year full of unfulfilled hopes, 2019 seems to be the perfect year to settle the foundation. Do you want to prepare a new investment strategy? The unusual stability of the market lets you think it through. Do you want to consolidate your wallets? The fees can’t go lower than this, so now is the best time to move your coins around. Do you want to cleanse yourself from the risks of centralized exchanges? The alternative DEXs are so advanced today that making the shift doesn’t require any change in the process that you are already familiar with. I can only open the path for you with a handcrafted list of three user-friendly DEXs, the rest is up to you!
VDEX is a decentralized digital assets exchange which is not all that different from a standard DEX. What makes it special, though, is the DAE (digital assets ecosystem) that’s part of it. Such an ecosystem is governed by a DAO (decentralized autonomous organization) that can ensure its ability to become self-regulating, autonomous, and serve its users’ needs. Part of the suite of software solutions that VDEX is offering is the multi-currency wallet VERTO. VDEX paired with VERTO permits local management with keys and a seamless trading experience comparable with the already-established conventional stock market trading process.
Built on top of existing open-source technology from the EOS.IO project, VDEX is not limited by the underlying technology of the tradable tokens. Cross-blockchain communication is allowed while digital assets such as BItcoin, EOS, their native digital coin VTX, and all the other supported blockchains currencies remain in the user’s custody the entire time. VDEX shows us that easy authentication and enhanced access can be guaranteed with the same transaction speed and security of a centralized exchange.
Even if KyberSwap is not a fully-fledged trading platform, Kyber’s solution is worth mentioning in this short list due to its simplicity. Not only can be used to exchange and convert digital assets as a decentralized exchange, but it can act as a proxy payment service at the same time.
Let’s understand their unique solution. KyberSwap is an interface for a platform powered by smart contracts and maintained by a reserve of tokens. The smart contracts act as a decentralized gateway for conversion and exchange of digital assets and the active reserve of tokens makes sure the process is instantaneous. It doesn’t require any blockchain confirmations, there are no deposits required, and all the transactions are handled by the platform directly from and to your wallet. KyberSwap can integrate different wallets, but this implies that the user should already have knowledge of how to use MetaMask or a hardware wallet like Ledger or Trezor. Cross-chain trading is not available yet either. It might be just a matter of time because Kyber is already working on a solution that’s about to come this year and a mobile app is already in beta testing. Could a DEX become even better than centralized solutions?
Paradex, functionality-wise, is a decentralized exchange not too different from the other two listed above. What makes Paradex unique, however, is the technology that’s built on: the 0x protocol. the 0x Project is solving the current liquidity problems among DEXs by developing a protocol that allows them to connect to each other and settle the transactions off-chain. Only once the exchange is successfully completed can the transaction be written on the blockchain. The process is faster, less expensive, and solves the trust issues between these platforms. On Paradex, all transactions occur through the 0x smart contract that leverages the protocol’s advantages.
Paradex keeps its interface tidy and without clutter or overwhelming features that can intimidate the average user with no trading experience. However, only ERC20 tokens on the Ethereum blockchain are supported and just the limited few tokens that the developers implemented for trading. Paradex was acquired by Coinbase last year, but we still don’t know if they’re planning to enhance the platform or just use its functionality for their own exchange.
This is it for my short list of emerging decentralized exchanges that’s worth a try in 2019. Any of the mentioned DEXs can easily compete with any of their centralized counterparts in terms of functionality, features, and user-friendliness. But the most important advantages of using such a platform are increased security and the reduced risks in case of regulatory actions that are becoming more popular throughout the globe.